Pension Glossary

ACCRUED BENEFIT
A benefit that an employee has earned (or accrued) through his participation in the plan. In a defined contribution plan (i.e. a profit sharing/401(k) plan), the accrued benefit of a participant is the balance in his individual account at a given time. The accrued benefit should not be confused, however, with the benefit that a participant has a “vested” right (non-forfeitable) to receive if he leaves prior to retirement. This benefit is determined by referring to the plan’s vesting schedule and the years of service credited to the participant.
ACTUAL DEFERRAL PERCENTAGE (ADP)
The percentage of an employee’s compensation contributed to a cash-or-deferred plan.
AFFILIATED SERVICE GROUP
Generally, an affiliated service group consists of two or more related services or management organizations, whether or not incorporated. Employees of the members of an affiliated service group are treated as employed by a single employer for plan qualification purposes.
ANNUAL ADDITION
Term used in connection with the limitation on the contributions that may be made for a participant under a profit sharing plan and other plans that use individual account balances. The annual addition to a participant’s account cannot exceed the lesser of 25% of his compensation or $30,000. Annual additions are arrived at by counting allocations of employer contributions, forfeitures, and employee elective contributions.
BENEFICIARY
A person designated by a participant or one who, by the terms of the plan, is or becomes eligible for benefits under the plan.
BREAK IN SERVICE
A computation period during which an employee is credited with less than 501 hours of service. For participant purposes, a break in service may mean that an employee must again meet the eligibility requirements to re-enter the plan.
CASH-OR-DEFERRED PLAN
A qualified profit sharing or stock bonus plan that gives a participant an option to take cash or have the employer contribute the money put into the plan for his/her benefit. Alternatively, the plan may take the form of a salary reduction arrangement.
COMPENSATION
Compensation paid to a participant is the basic factor that employers use to determine the amount of contributions that will be allocated to a participant’s account under a defined contribution plan. IRS requires that the definition used in the plan not be discriminatory (i.e. favoring highly compensated employees over lower-paid employees). Further, a ceiling may apply to the amount of compensation that may be taken into account under certain types of plans.
COMPUTATION PERIODS
All plans must specify a period for determining employee credits towards eligibility and vesting.
CONTROLLED GROUP OF CORPORATIONS
There are three types of controlled groups: (1) the parent-subsidiary controlled group, (2) the brother-sister controlled group, and (3) the combined group. A controlled group of corporations and businesses should be treated as if they were employed by one employer for purposes of the coverage and discrimination qualification requirements of the Internal Revenue Code.
COST-OF-LIVING ADJUSTMENTS
Adjustments that are made annually by IRS to the limitations on maximum contributions that can be made to a qualified profit sharing/401(k) plan for a particular taxable year. The adjustments reflect cost-of-living increases.
DEFINED CONTRIBUTION PLAN
A plan that provides an individual account for each participant and in which benefits are based solely upon the amount contributed to the account (plus or minus any income expenses, gain and losses allocated to the account).
DETERMINATION LETTER
Letter issued by the IRS District Director’s office determining that a plan submitted to it meets the requirements for qualification (or does not meet those requirements).
DISCRIMINATION
Where a plan, through its provisions or through its operation, favors officers, shareholders, or highly compensated employees to the detriment of other employees.
DISQUALIFICATION
Loss of qualified (tax-favored) status by a plan, generally resulting from operation of the plan in a manner that is contrary to the provisions of the plan or that discriminates against rank-and-file employees.
DOL
Department of Labor
EMPLOYEE
An individual who provides services for compensation to an employer and whose duties are under the control of the employer.
ERISA
Employee Retirement Income Security Act of 1974. This is the basic law covering qualified plans and incorporates both the pertinent Internal Revenue Code provisions and labor law provisions. ERISA is the basic law designed to protect the rights of beneficiaries of employee benefit plans offered by employers, unions, and the like. ERISA imposes various qualification standards and fiduciary responsibilities on both welfare benefit and retirement plans, and provides enforcement procedures as well. It also provides standards for tax qualification.
FIDUCIARY
Any person who exercised discretionary authority or control over the management or disposition of plan assets or who gives investment advice to the plan for a fee or other compensation.
5% OWNER
Any person who owns, directly or indirectly, more than 5% of the stock of the employer. If the employer is not a corporation, the ownership test is applied to the person’s capital or profits interest in the employer.
FORFEITURES
The benefits that a participant loses if he terminates his employment before becoming eligible for full retirement benefits under the plan.
HIGHLY COMPENSATED EMPLOYEES (HCE’s)
Those employees who: 1) during the year the preceding year is (or was) a 5% owner or 2) received compensation in excess of $80,000.00 (adjusted for cost-of-living increases) during the preceding year and was a member of the top-paid group of employees (if the employer elects). A plan cannot discriminate in favor of this group.
HOURS OF SERVICE
An hour that is credited to an employee for purposes of becoming eligible to participate under the plan and also for purposes of vesting and the accrual of benefits. An hour of service is not limited to the hours actually worked by the employee, but includes hours that may be credited for holidays, vacations, etc.
INTEGRATED PLAN
A plan that takes into account either benefits contributions under Social Security. Social Security contributions are used to integrate a defined contribution plan.
INTERESTED PARTIES
Generally means all employees at the time the employer applies for a determination letter relative to a pension or profit sharing plan. IRS requires that interested parties be notified when the application is made.
JOINT AND SURVIVOR ANNUITY
An annuity paid for the life of the participant with a survivor annuity for his/her spouse. The survivor annuity must be at least 50%, but not more than 100%, of the annuity received by the participant during his/her lifetime. In addition, the joint and survivor annuity must be the actuarial equivalent of a single life annuity that would have been paid to the participant.
KEY EMPLOYEE
A participant who, at any time during the plan year or any of the four preceding years is (or was): (1) an officer who earns in excess of 50% of the annual dollar limitation for defined benefit plans, (2) one of the 10 employees owning the largest interest in the employer and receiving annual compensation of more than $30,000, (3) a more than 5% owner of the employer, or (4) a more than 1% owner earning more than $150,000.
LEASED EMPLOYEE
Someone who is normally the employee of a leasing organization who performs service for another person or business (the “recipient”) if: (1) the services are provided under an agreement between the recipient and the leasing organization, (2) the employee has performed services for the recipient on a full time basis for at least one year, and (3) the services are of a type historically performed in the recipient’s business field by employees. Leased employees may be considered as employees of the recipient for plan qualification purposes.
LUMP-SUM DISTRIBUTION
A type of distribution that is required for purposes of using the forward averaging method in computing the income tax that is due. The basic requirements to qualify as a lump sum distribution are (1) the distribution must be made within one taxable year of the recipient, (2) it must include the entire balance credited to an employee’s account, and (3) it must be made on account of an employee’s death, separation from service (except in the case of a self-employed person), or attainment of age 59-1/2 (or in the case of a self-employed person only, on account of disability).
NAMED FIDUCIARY
A fiduciary who is named in the plan instrument or identified through a procedure set forth in the plan.
NORMAL RETIREMENT AGE
The time when a participant attains retirement age under the plan. Usually, it is age 65. However, it may be another age (as set forth in the plan) and may also require a stated period of plan participation. Full vesting is required when a participant attains normal retirement age.
OFFICER
An administrative executive of a corporate employer who is in regular and continued service. One employed for a special and single transaction or one who has only nominal administrative duties is excluded.
1% OWNER
Any person who owns, directly or indirectly, more than 1% of the stock of the employer. If the employer is not a corporation, the ownership test is applied to the person’s capital or profits interest in the employer.
OWNER-EMPLOYEE
A sole proprietor or a partner who owns more than 10% of either the capital interest or the profits interest in a partnership.
PARTICIPANT
An employee, sole proprietor, or partner who is covered by a qualified plan.
PARTY IN INTEREST
A person who, because of his or its relationship with the plan (i.e. as a fiduciary, as a provider of services, as the plan sponsor) is prohibited from entering into certain transactions with the plan.
PLAN ADMINISTRATOR
The person designated by the plan as administrator. If no designation is made, the plan administrator is the employer. The plan administrator is the person responsible for managing the day-to-day affairs of the plan.
PLAN YEAR
Any 12-consecutive-month period that has been chosen by the plan for keeping its records. The 12-month period may be the calendar year, a fiscal year, or a policy year (where insurance is used to fund all plan benefits). The plan year does not have to coincide with the employer’s taxable year or begin on the first day of the month. Change of a plan year usually requires the consent of IRS.
POOLED SEPARATE ACCOUNT
A pooled separate account is an account maintained by an insurance carrier that is regulated, supervised, and subject to periodic examination by a state agency for the collective investment and reinvestment of assets contributed to such account from employee benefit plans maintained by more than one employer or controlled group of corporations (as defined in Code Section 1563).
PROHIBITED TRANSACTIONS
Specified transactions that may not be entered into (directly or indirectly) by a party in interest with the plan. Those include, for example, sales or exchanges, leases, and loans between the parties. The Department of Labor may exempt a specific transaction from the prohibited transaction restriction.
PROTOTYPE PLAN
A retirement plan that is sponsored by a financial institution such as an insurance company, a bank, a mutual fund, a stock brokerage firm and that may be adopted by an employer merely by executing a participation agreement.
QUALIFIED PLAN
A plan that meets the requirements of the Internal Revenue Code (generally Section 401(a) ). The advantage of qualification is that the plan is eligible for special tax considerations. For example, employers are permitted to deduct contributions to the plan although the benefits provided under the plan are deferred to a later date.
QUALIFIED TOTAL DISTRIBUTION
One or more distributions from a plan (a) within one taxable year of the employee made on account of the termination of the plan or a complete discontinuance of contributions to the plan, or (b) that constitute a lump-sum distribution. A distribution of accumulated deduction employee contributions is also a qualified total distribution. A qualified total distribution may be rolled over to an IRA.
ROLLOVER
A tax-free transfer of cash or other assets from one retirement plan to another. The account owner may shift assets from his present IRA or qualified retirement plan to another. Certain payouts from a pension plan may also be rolled over to an IRA or to another employer’s plan.
SALARY REDUCTION ARRANGEMENT
Under this type of cash-or-deferred plan, each eligible employee may elect to reduce his current compensation or to forgo a salary increase and have these amounts instead contributed to the plan on his behalf. This type of arrangement permits the company to establish a plan in which contributions are made with pre-tax employee dollars.
SHAREHOLDER EMPLOYEE
A more than 5% shareholder of an S corporation.
SUMMARY PLAN DESCRIPTION (SPD)
A detailed, but easily understood summary describing a pension plan’s provisions that must be provided to participants and beneficiaries.
TOP-HEAVY PLAN
Beginning in 1984, a plan that primarily benefits key employees is considered top-heavy and qualifies for favorable tax treatment only if, in addition to the regular qualification requirements, it meets several special requirements.
TRUST
A fund established under local trust law to hold and administer the assets of a plan.
TRUSTEES
The parties named in the trust instrument or plan who are authorized to hold the assets of the plan for the benefit of the participants.
VESTED BENEFITS
Accrued benefits of a participant that have become non-forfeitable under the vesting schedule adopted by the plan.